Unions, public pensions, and fiscal challenges

18 July 2011|
1:38 PM

Where’s the easy button to address state and local fiscal problems? In fact, some 580,000 state and local employees have been laid off since the recession began and workload pressures have grown on those who remain. Some employees have gone without a pay raise for as many as three years.

Wait -- there’s more! State and local revenues still have not returned to 2008 levels, while governments watch their health care costs continue to rise faster than inflation. Likewise, the demand for social services remains high due to high levels of unemployment. Are public employees making appropriate sacrifices?

Here are a few facts:

In a May 2011 survey of state and local government human resource managers, the Center for State and Local Excellence found that

69% of governments had made changes to their retirement benefits

23% raised employee contributions to pension plans

10% increased the years to vest in a plan

53% of governments made changes to their health benefits and 70% shifted more costs to employees

One narrative suggests that state and local finances are stressed because unions demanded unaffordable benefit enhancements. While many pension plans enhanced their benefit levels between 1999 and 2007, was it because of unions?

The answer is more complex than you might imagine. According to the latest Center for State and Local Government Excellence study, “Unions and Public Pension Benefits,” legislators approved increases in benefits just about everywhere, whether in a union or non-union environment. Competitive pressures drive compensation levels and times were good a decade ago. Governments did not want to lose their employees to a neighboring city or state because they were offering less generous benefits.

But is there a statistical correlation between pension generosity and union membership? Alicia Munnell’s team of researchers at Boston College found that union membership has a significant impact on wages, but no measureable impact on the pension benefit formula.

Legislators have been busy rolling back pension benefits for the past two years. According to the National Conference of State Legislators, 42 states have made changes to their pension plans since 2009, including increases in employee contributions and the retirement age, lower benefit level for new hires, and reductions in the cost of living adjustment.

What kind of compensation package will we need in the future to attract and retain the people we need to provide critically important services? If we make changes in retirement plans, will we do so in a way that allows career public servants to retire with a middle class lifestyle?

My bottom line: It will take as long to get out of this economic hole as it took to dig it. Patience is not an American virtue, but we can get focused on a goal when we understand its importance.